MENA Workshop on Private Pension Supervision 1-2 March 2011, Amman

Ross JonesIOPS President

SUPERVISING DC PENSION SYSTEMS

Difference DB /DC Supervision Inherent risks are the same in DB/ DC pensions…… who bears them is the key difference

Individuals are responsible for DC risks ……but their understanding is low…… which is the problem that lies behind all DC issues

Transparency is therefore the 1st control mechanism……but low levels of understanding means that it can only partially

work

Other control mechanism are therefore needed……which to use depends on the nature of the pension system

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Transparency and Education Mechanisms Information disclosure requirements

OECD guidelinesIAIS stress how as well as what is disclosed is

importantSome countries prescribe precise format of documents

(Chile, Italy, Mexico, Slovakia)Others how information should be disclosed (e.g. net of

charges/ frequency of reporting / risk or volatility as well as returns)

Some authorities approve key documents prior to publication (Bulgaria, Hong Kong, Slovakia)

Some check for compliance after (e.g. Turkey)Supervisors themselves can provide comparative

information (e.g. Chile, Hong Kong)Others play a role in educating members (e.g.

Ireland)3

DC Specific Risks and controlsInvestment Risk

Risk-management systemsRisk limitation measuresTarget outcomes

High costCost control

Operational RiskRisk-management systems

Accumulation to Decumulation PhaseManaging the transition to pension-payment

phase4

Investment Risk ControlRisk-management SystemsRisk-management systems

Some supervisory authorities lay out detailed requirements (e.g. Mexico)

Others more general guidance (e.g. UK, Australia)

OECD guidance Management Oversight & Culture Strategy & Risk Assessment Control Systems Information, Reporting & Communication

Statement of Investment Principles is a key part of risk-management

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Investment Risk ControlRisk Limitation Measures

Quantitative Investment Limits

Life-cycle Funds

Risk limits (VaR)

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Investment Risk Control Target OutcomesGuarantees

Absolute (e.g. Belgium, mandatory funds Romania)Relative (e.g. Poland)

Replacement Rate Targets

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Cost ControlImprove Transparency

Specified structure (e.g. Italy, Mexico)Supervisory authority comparisons (e.g. Hong Kong, Spain)

Fee Caps (e.g. Israel, Eastern Europe, UK stakeholder fund)

Not unreasonable test (e.g. New Zealand, USA)

Control mechanismsAllocate members to lowest cost provider (e.g. Chile)Restrict switching (e.g. Colombia, Bulgaria, Estonia)License low cost providers (e.g. Macedonia, Bolivia)Centralized/ collective services (e.g. Poland, Mexico)

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Operational Risk ControlOperational risks require focus in different countries:

Fund transfers (Israel)Record keeping (UK) IT (Nigeria)Data integrity (Australia)Conflicts of interest with providers (Chile)Contribution collection (Hong Kong)

Risk management systems at pension funds 1st line of defence

Outsourcing risk particular issue for DC fundsPension supervisory authority may oversee contractors…Or coordinate with other authorities… Or require pension fund to check the systems of their contractors

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Accumulation to Decumulation Phase

Require certain type of product (indexed life annuity)

Timing risk via flexibility when purchase

Assistance chose between types of product or annuity

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Supervisory ToolsNature of the pension system determines

choice of control mechanismControl mechanisms used determine

supervisory approach

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Supervising DC in AustraliaOverview of superannuation (pension) system

Supervisory structure

Risk control mechanisms

Supervisory tools

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Nature of the pension system - Australia1st Pillar – means-tested, approx 25% average wage2nd Pillar – mandatory 9% wage/salary paid by

employer to superannuation (pension) fund3rd Pillar – voluntary additional contributions paid

by employer and/or employee Trust-based and largely DCNo guarantees, no cost controls, no quant limitsDeveloped financial markets - private sector

providersMany functions outsourced, eg custody,

investment, administrationApprox 1/3 pension assets are in self-managed

funds, balance in prudentially regulated funds14

Regulatory structure - Australia“Twin Peaks” model”

Prudential regulator – APRAMarket conduct and disclosure – ASIC

Self-managed funds regulated by ATO Interests of trustees fully aligned with interests

of memberstherefore not prudentially regulated

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Risk control mechanisms - AustraliaPrudent person approach“Fit & proper” – directors & management of

trustee entityFund risk management framework must be in

placeGovernance and decision-making processesInvestment Outsourcing arrangementsLegislative changeFraud/theft

Market mechanismsChoice of fund

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Supervisory tools – Australia (1)In the prudentially regulated sector, use

many of the tools shown earlier for both Pension Systems A and BLicensing of trustee entitiesRegistration of fundsandReporting: (comprehensive but less intensively

than in some systems discussed earlier) Quarterly and annual reporting Supports on-site supervision Source for statistical analysis and publications

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Supervisory tools – Australia (2)Risk-based approach to supervision

Publication of guidance as to our expectations Intensive on-site visits on maximum 2-year cycle More frequent depending on risk rating Risk rating is a function of probability of failure and

impact of failureAudit and actuarial requirementsRange of enforcement powers: suasion (to

modify risky behaviour) through to removal from industry

Impending reforms

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